Ferguson vs Crown Life and William Casteel - V4of23 - 204p

  • 1995 0818
  • URMAS VILMANSEN (By Deposition)
    • Direct Examination by Mr. Bostwick----------------- 657
    • Direct Examination (Contd.) by Mr. Bostwick-------- 754
  • [(p754-) - DIRECT EXAMINATION - Continued - Questions read by Mr. Bostwick (Ferguson)]
  • 754 - Exhibit 8 is another memo that you wrote on the 17th of February to Dave Ferguson, and in the first sentence you say:
    • 'As promised to you, I am working on writing up what I think is a "least damaging" approach to reduction of "our dividend scale." Let me visit with you first about the introduction there as promised to you.'
  • 757 - I want to show you Exhibit 9. I take it this is some ·
    information passed on to the general agents by yourself
    regarding the introduction of the M.V.P. product?
    "A That is correct.
    "Q And as I understand it -- you tell me if I'm wrong -the
    chief characteristic or selling point of this product
    was that it achieved a vanish in five years?
    The premiums end after five years, but it's not a
    true vanish because the basic policy, instead of
    continuing to be an active policy where there's still a
    contractual agreement to pay a premium for coverage,
    instead it becomes a reduced paid-up policy.
    "Q And was M.V.P. selected as the name because it was an
    acronym for 'modified vanishing premium'?
    "A Yes, and also an acronym for many other things.
    11Q Like 'most valuable player'?
    ".A Yes, we're trying to get a certain ballplayer to .buy
    this.
    "Q Are you serious?
    "A Mm-hmm.
    "Q Who was that?
    "A Don Mattingly, but they decided not to."
  • 759 - 27th day of February of '86 that
    you're writing this?
    "A Yes.n
    "Q Exhibit 10 is titled 'M.V.P. Text for Dave Ferguson'.
    Is this a text of a speech that you wrote for Mr.
    Ferguson?
    Yes.
    nQ Do you know where he was supposed to give this speach
    (sic)?
    "A No, I don't.
    "Q Do you know whether or not he ever gave this speech?
    "A I know that he did present it, and he told me that it
    went well, but I cannot remember what the event was.

    • nTHE DEPONENT: I don't know
      specifically. But it would have been to the general
      agents.
  • 760 - Let me show you what's been marked as plaintiffs'
    Exhibit 11 entitled 'Conserve-Plus Fact Sheet'. Is this
    something that was distributed to the general agents?
    "A This was distributed to the general agents in a
    brochure that was made available for them to provide to
    brokers. Not a brochure, I'm sorry. It was a folder
  • 759-760 - 'Marketing support material'. Was there a video that
    went along with Conserver-Plus?
    "A Yes, there was.

    • Where was that video kept?
      "A Where was it kept? It was a VHS format, and a copy
      survives in my house to this day.
      "Q
      "A
      RQ
      Oh, you've got a copy of the video?
      I have a copy of the video.
      Would you visit with Mr. Becker at some break in the
      proceedings and see if you wouldn't mind getting me a copy
      of the video?
  • 760 - 11A Did you see 'Patton'? You don't have to see the
    video if you've seen 'Patton'.
  • 764 - One of the product features listed there, number 4,
    is that emphasis has been placed on low initial premium.
    Was that, in fact, an emphasis of the Conserver-Plus
    product?
    "A That was a definite emphasis.
  • 765 - Q And Exhibit 17. Is this memo sending out the
    computer disks for these two new products, Conserver-Plus
    and M.V.P.?
    "A Yeah, this provides for a stand-alone microcomputer
    system. The Life Ledger program.
    "Q
    "A
    So this is separate and apart from the SIGMA system?
    That's correct.
  • 770 - "Q On the bottom of the second page, under the heading
    'Admired Companies', subheading of 'New England Mutual',
    there's a reference to Jim Hicks. Did you get information
    from Jim Hicks about New England Mutual?
    "A I don't recall, but according to this, I did.
    "Q Was Jim Hicks one of the general agents with whom you
    discussed the potential change in dividend scale, as
    referenced in the first sentence of this memo?
    "A I don't remember.
  • 772 - In the second paragraph on the first page under the
    heading 'Market Sensitivity', you make the statement that:
    'As far as Crown Life is concerned, dropping our
    dividend scale in the 1970s dramatically hurt sale.a
    on participating business.'
    What knowledge do you have about that? Is that personal
    knowledge?
    "A Yes.
    ilQ You were there during the dividend scale drop in the
    1970s?
    "A Yes.
    How big was the drop in the 1970s?
    "A I don't recall, but it was a deliberate drop to
    reduce sales of participating business.
  • 773 - If you don't know, you can tell me, but my question
    to you is: Legally, actuarially, ethically is it possible
    for a company to reduce its dividend scale, despite the
    fact that the interest it may be earning out of the market
    and the expenses it may be experiencing would support the
    current dividend scale?
  • .........
  • 787-788 - "Q Okay. The third item says:
    'Members of the product committee have ,started to
    push for the capability of showing more than on set
    of dividends on illustration, current and more
    conservative.'
    That seems like a reasonable request. What happened to
    that?"
    "A Right. It's a difficult question, because the
    illustration system actually had dividends stored in the
    rate files that were used for those illustration systems.
    So to provide a separate set of dividends would have
    required some sort of work done so that those dividends could actually be calculated in the system, as opposed to
    coming from a rate file.

    • "The other alternative is to have just two sets, one
      on the current scale and one on a more conservative scale,
      if you like, but again, that would cause a lot of problems
      on the actual software. So that was one of the reasons
      why we never did that.
    • "Also, there is the question about whether or not
      you're allowed to show different dividends than you are
      currently providing on a current dividend scale. You are
      able, as far as I know, to show different accumulation
      rates and everything, but whether or not you can show a
      different dividend from what is in your scale, I don't
      know it that's true in all jurisdictions.
  • 791-792 - Q Let's look at Exhibit 28. This is a letter that you wrote to Tom Rhatigan in San Diego. Is he a general agent?
    • A He was an associate general agent, and Robert E. Lee owned the agency in San Diego at that time.
    • Q He was a general agent present there in the San Diego
      office?

      • A Yes.
    • Q I was intrigued by your statement in the second numbered paragraph.
      • A Mm-hmm?
    • Q You tell him that the 4-Pay and 5_pay concepts work because of the spread between the dividend rate and the current loan interest rate, but if they get closer together, that concept erodes?
      • A Yes.
    • Q Was that generally recognized among your agents in field force in 1986?"
      • THE DEPONENT: I know that some general agents knew this, I know that I talked to some, but whether it was well-known and known by everybody, I can't say.
    • [MORE]
  • 794-795 - Tillinghast / Tillinghast study
  • 803-804 - Exhibit 40 basically is a memo to Jerry Campbell,
    senior vice-president of U.S. individual insurance,
    regarding portfolio and/or investment generation.
    "And essentially one of the questions that relates to
    dividends is whether or not you can subsidize one block of
    business with another block, and as part of our research I
    went and talked to an actuary, Keith Deviney, and I also went and looked up what the American Academy of Actuaries
    had to say about it.

    • Becker: Objection. It could be misconstrued
  • 806 - It says in the second sentence that you examined a
    report from the American Academy of Actuaries regarding
    dividend recommendations and interpretations.
  • [(p654-) - URMAS VILMANSEN - Crown - Senior Marketing Analyst for U.S. Individual Insurance. (By Deposition) - Direct Examination by Mr. Bostwick (Ferguson)]
  • 654 - Plaintiff's Exhibit 4 - PROVE and its Applications - Vanishing Premium, dated October, 1984.
  • 657 - (see GA Manual Mailing 1984-21).
  • Work History
  • Crown Life Products
  • 666 - "Q The policy at issue in this lawsuit is a
    Conserver-Plus policy. Tell me, if you would, just
    generally what was involved, from your standpoint, in the
    introduction of the Conserver-Plus product.
  • 667 - Because Crown has
    always been a .general agency company, and so it has to
    sell the products successfully to its brokers.
    "Q What do you mean by 'bases of presentation'?
    "A I mean what sort of illustrative basis it's set up
    under. What type of illustration, for example vanishing
    premium, or back then minimum deposit.
    "Q All right. when you say you got input from the field
    force, did you go out to your agents and ask them what
    their competitors were doing?
    "A Yes.
    "Q Did you do that personally, or did you supervisor
    someone or a group of people that actually did that for
    you?
  • 668 - Crown Life Organization explained
  • 679 - 11Q Was that separate and apart from the marketing area?
    "A Yes. The agency and marketing areas were completely
    separate, although we would talk to the agency people
    quite regularly.
  • [Bonk: Competitors had Vanishing Premium]
  • 672 - Art vs Science
  • 673 - [Bonk: Actuarial vs Marketing]
    • "A Yeah, for the numbers we relied heavily on the
      individual actuarial area, and for the language of the
      actual policy we would work with the compliance area.
  • ECTA - Illustrations
  • "Q But the illustration system was called the SIGMA
    system?
  • We also had an internal mainframe system called CAPS, and agents could call in and they could have proposals prepared at home office and sent to them the next day. We also had some microcomputer basic systems that were developed internally.
  • 680 - "A
    Sure.
    When I talk about vanishing premium, I talk about
    what's called a natural vanishing premium.
    11 Q I want to use a broader term that what you all have
    said, 'vanishing premium', because I think we've got
    some -- we may need to back up and define some terms.
    "A
    "Q
    Fair enough.
    Vanishing premium has kind of been knocked around
    here, N-Pay or . 4-Pay, 5-Pay, modified vanishing premium,
    and limited pay option are some of the terms.
    "A Mm-hmm.
    "Q Generally we're talking about a capability of a
    product to provide the consumer with a point past which on
    premiums need to be paid out of pocket.
  • 682 - "The theory is that the amount of the cash values in
    the paid-up additions, plus the dividend stream from the
    coming year, which is the vanishing year, up to the
    critical year; that the dividends plus a partial surrender
    of paid-up additions that are already there will be enough
    to pay the premiums for that period of time, and then as
    of the critical year, the dividends are sufficient to pay
    from there on.
    "Q
    "A
    "Q
    "A
    "Q
    Is that consistent with natural vanish?
    That is a natural vanish.
    That's what you refer to as your natural vanish?
    Yeah.
  • 682 - Vanishing Year vs Critical Year
  • 682 - "Q So in a natural vanish, the vanishing year is when we
    can use a mix of dividends and surrenders?
    11A Correct.
    "Q And then the critical year is when we can reduce the
    surrenders to zero, and that's just completely dividends?
    "A Yes.
  • 683 - APP - Abbreviated Payment Plan, Vanishing Premium, Equity Rider - Plus Rider (Crown), Leverage, 
  • 683 - "A No, I think there are two types here, and I think
    there are two sets you worry about. The first one is
    vanishing-type products, and the second one is leveraged
  • 684 - Minimum Deposit, N-Pay, Super Vanish, 4 of 7 years premium, Loans to pay the remainder of the Premium, Tax Deduction, Tax Code - ERTA - 1986 -
    • 685-686 - "Q Did that make minimum deposit then obsolete when it changed?
      • "A It made the tax deductibility aspect obsolete, I believe.
  • 687 - "Q
    Yeah, the equity value. It would increase.
    The equity value would also increase every year?
    That is correct.
    And under this scenario, is it necessary that the
    687
    equity value against which you're borrowing increase at a
    greater rate than the loan is increasing?
    "A For the policy to stay in force forever, yes.
    "Q I can just imagine a situation where if I've got a
    limit on how much -- if this concept assumes I'm going to
    borrow all of the future premiums, but it includes in
    there a limitation that I can't borrow past a certain set
    amount that's established by this equity, which amount
    increases every year, isn't it important for that type of
    scenario that the amount against which I'm borrowing
    increase greater than the amount I actually borrow, so
    that I never reach the limit?
  • 688 - "A It may be presented, and it's presented on the basis
    that you're operating under a specific dividend scale at
    the time, whenever the policy is purchased, and none of
    those are guaranteed. The only guarantee you have are the
    premium amount and the guaranteed cash values, and the
    basic face amount.
  • 689 - 11Q So we've gone through vanishing premium concepts, and
    we've gone through what you've called leveraged premium
    concepts.
  • Mix and Match
  • 690 -or putting in the automatic premium loan feature,
    which is the default in most insurance companies anyway.
  • 691 - "A When you say 'that mix', you're specifically
    referring to a combination of vanishing premium or with
    policy loan?
    "Q Right.
    "A We didn't encourage it, no.
    "Q Did you make sure that the illustration systems that
    you gave to the field force, the gents who were out there
    selling the policies, that that system had the capability
    of doing that?
    "A I'm not sure what capability SIGMA had with respect
    to that, and I couldn't comment on what ECTA could do.
  • 693 - 11Q Mr. Vilmansen, understanding that you didn't have the
    authority or the power to dictate when dividend scales
    ought to be changed, or what they ought to be changed to,
    it was still within your employment and within the scope
    of your employment to communicate what you knew about
    those things to other people; wasn't it?
    "A Yes, from a marketing perspective.
    "Q The things that you knew. And you wrote these memos
    because you were trying to communicate information to
    people that you thought needed to know that; right?
    Yes.
  • 693-694 - And although you might have had wishes or desires
    that it be done one way, which wishes and desires weren't
    necessarily those of Crown Life, you were still authorized
    to state your wishes and desires to the people that cared
    to hear them?

    • 694 - "A No, I'd be careful about that. If it was something
      internal, yes. .....
  • Exhibit 212 - Memo - From: Mr. Boeckner senior vice-president of U.S.
    insurance operations at Crown Life in September, 1985 - Download to information to Lotus 1-2-3

    • Things that weren't part of our general  systems. And it was exclusively for the use of the general agents, and it was not to be distributed to anybody else.
  • 696 - 11A I'm not being paid for outside work, but Crown Life
    is paying me for the preparatory work to get ready for
    this deposition.
    11Q Okay. You're not being compensated, though, for the
    time you're spending here actually giving testimony?
    "A Well, I fully expect you to compensate me for that,
    and I believe my lawyer was -- I .did provide my lawyer
    with instructions to contact you with respect to that.
    "Q
    "A
    Well, we may have a misunderstanding in that regard.
    We may.
  • 698 - I understood
    that in some case, in some proceeding, a particular letter
    which I sent out to the general agents was signed by me,
    and as a result people said, 'Who is this guy?'
    "Q And Kevin Hayes came and found you and asked you
    about those thing?
    "A
    "Q
    "A
    "Q
    That is correct.
    Did he have a meeting here in Toronto with you?
    Yes.
    And did you provide him at that time with some of
    your file materials that you had kept?
    "A Yes.
  • 703 - [Reasons for Crown Life to Move it's Home Office from Toronto to Virginia - Official and Unofficial]
  • chronological file
  • 714 - 1985 1219 -  Exhibit 213 - 
  • 714 - Exhibit 214 - 214 is not dated, but also talks about
    the dividend scale. Do you know in this chronology where
    214 fits?
    "A Okay. 214 was written in preparation of a general
    agents' meeting of either the 20th or the 21st of January,
    1986. The actual date that was prepared I'm not -- I
    couldn't tell you, but it would have been sometime
    between -- you know, after the previous memo and before
    January the 21st.
  • 722 - Q In Exhibit 213, Mr. Vilmansen, you say that: 'Corporate is considering very strongly reducing your dividend scale.'
  • -725-  - Letter -
    • 'The high dividend scale and accumulation rate we
      currently use are central to the vanishing premium
      concept which we look so good in currently. A drop
      in dividends would probably increase our vanishing
      premium points, causing a lost of business. Further,
      the adverse publicity of dividend scale change would
      result in ... '
  • 726 - "A It means that 'Further, the adverse publicity of
    dividend scale change would result in, would force many of
    our agents to spent at least part of their time.'
    "Q Okay.
    "MR. BECKER: Dividend scale change
    would result in adverse publicity.
    "MR. TEKELL: I see.
    "BY MR. TEKELL:
    "Q ' ... and .would force many of our agents to spend at least part of their time defendant instead of promoting Crown Life.'
    You foresaw that those were probable consequences of a
    reduction in dividend scales?
    "A Yes.
  • 727 - "Q Was that insight yours only, or was that pretty much common knowledge among people of your stature in insurance companies in general?
    "A It think that was pretty well common knowledge among people in marketing in other insurance companies, as well as in Crown.
    Q So you weren't telling them anything new about that?
    A No. No, no, no.
    Q The second page talks about I guess your suggestions on how these consequences can be softened. Is that a fair statement of that?
  • 728 - "Q Let's look at Exhibit 207.
    "A Yes.
    "Q Does that talk about Conserve-Plus?
    "A No. This talks about the original Conserver product,
    which was different from Conserve-Plus inasmuch as, for
    one thing, it did not have a jump in cash value at the
    first death.
    "Q Okay. Let's look at Exhibit 211, which is a memo
    dated August 23rd of 1985. Does this discuss the
    Conserver product? Conserver-Plus product.
    "A That's what I'm checking. Let's see. This would be
    done for the Conserver-Plus product, yeah.
  • 728-729 - "Q You and I discussed before about how you would come
    up with a concept of a product, and then draw on the
    capabilities and talents of various departments to bring that together. Is this part of that process, this memo of August 23rd, 1985?
    "A Yes.
    "Q Can we use this as an indicating of about when it was
    being first proposed, or the middle of the development
    process?
  • ............
  • 730 - 
  • 731 - General Agents Meeting
  • 733 - "Q Tell me then, again, the best of your recollection
    about what Exhibit 214 was prepared for.
    "A 214 was prepared to set the stage as far as our field
    force was concerned, with respect to a potential change in
    the dividend scale for Crown Life.
    "Q Do you know whether or not it was distributed to any
    of the general agents, whether just the product committee
    or the .board of directors?
    "A I don't believe it was distributed. And I say that
    because if it had been given to the board of directors or
    to the product committee, I don't think I would have put
    that note at the top. I would have said 'distributed to'.
  • 733-734 - Note at top
    • "A It says "For GA meeting 21/1/86 -- not given out.'
  • 734 - "Q Back to 214 then. The information about the dividend
    scale reduction as essentially recorded here in Exhibit
    214; was that communicated to the board of directors of
    the general agents' association?
    "A It is my understanding it was.
    "Q
    "A
    "Q
    How was it communicated?
    I don't know.
    What's your expectation about how it was
    communicated?
    "A I believe it was discussed in a meeting with the
    board and with the product committee.
  • 735 - general agents' association
  • 736 - "A
    (No response.)
    Or was that selected by Crown Life?
    Yeah. I don't -- I can't remember us ever selecting
    any committee for the general agents. I do remember, you
    know, if somebody had something, you know, we could make
    suggestions. Let's say somebody said, 'Well, we're going
    to have a .product committee, and Bill Smith's going to run
    it.,
    •And we say, 'Well, what about Joe Blow from over
    here? He knows an awful lot about participating
    products.' And they say, 'Oh, well, you know, maybe
    that's a good idea. Joe, do you want to be on this?'
  • 738 - But I also feel that there would be an
    awful lot of pressure inside the GA's own organization to
    keep anything from leaking out regarding that sort of an
    event.
    HQ Leaking out to the general public, or leaking out to
    other general agents?
    HA Leaking out to competitors mainly.
    HQ But it wouldn't be something that you would instruct
    them to keep from other general agents, such as Jim Hicks...
  • 739 - I dealt on dividends with a specific group of agents
    called the dividend committee, and that was it.
    Is that different from the product committee?
    Yes.
    11Q When was the dividend committee -- when did you
    interact with them?
    11A the dividend committee was set up at some point after
    the January meeting ._ I believe it was actually set up
    somewhere after the middle of February.
    "Q And was that set up by the general agents'
    association in response to the information that you shared
    about the potential for a dividend reduction with the
    dividend committee, you would have no expectation -- would you? -- that that information would be kept secret from
    other general agents such as Jim Hicks in Austin?
    "A Actually, I think for the dividends I did have the
    expectation that at least for the first part of the
    negotiations it would be very secret."
    11Q So disclosures to the dividend committee: you had an
    expectation that that would be kept close to the vest
    within the committee at least in the short term?
    11A In the short term, yes.
  • 741 - Exhibit 208 - Letter - That is a letter with some attachments, and I think the letter and its attachments pretty much speak for themselves, but let me make sure I understand the last several pages that talk about the dividend history and dividend philosophy of Crown Life.
    • A Mm-hmm.
      Q Is there a title to this document?
      A Yeah, the actual name of it is 'Dividend History and
      Philosophy' 
  • 743 - plaintiffs' Exhibit 1, or PX-1. That's a memo, I guess,
    to the general agents from Dale Mathews?
    "A Yeah. It's actually part of a general agents' rate
    book mailing.

    • Dale Mathews is an actuary. She was at that time
      heavily involved in the U.S. individual product prodding.
  • 744 - In this document she's announcing, I guess, the
    change in the dividend scale that occurred in 1984.
    They'd upped the rate from twelve-and-a-half percent to
    thirteen percent for the dividend credit rate?
    That is correct.
  • 745 - "MR. BECKER: Let me object to the
    form of your question. The increase in twelve-and-a-half
    percent to thirteen percent is not the dividend scale, but
    the dividend accumulation rate. There are comments in the
    last paragraph about the dividend scale, but I don't see
    any reference to twelve-and-a-half or thirteen percent
    there.
  • 747 - PX-7 and PX-8.
    • These are two memos that you wrote, it looks like
      both to Dave Ferguson, on the 17th of February, 1986; is
      that right?
      "A That is correct.
  • 750-751 - "Q What is the basis, then, for your conclusion that
    M.V.P. and Conserver-P~us products would not be affected
    by the projected dividend drop?

    • "A I don't know. Anything I say on that would be
      speculative.
      11Q Do you think you had some basis for it at the time
      you wrote this?
      "A Yes, I imagine that we were pricing at those levels,
      and there had been good reason -- there had probably been
      several internal discussions as to why we would use
      whatever overall rate we were using.
  • 751 - 'When the re-pricing is done, we should examine ways
    to introduce a more conservative dividend scale, but
    retain the vanishing premium capability which both
    those products have.'
  • [Lunch]
  •